Remembering the Grandfather of Private Equity in an Era of 'Barbarians at the Gate'

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Remembering the grandfather of private equity in an era of 'Barbarians at the Gate' ! Jonathan Marino Aug. 3, 2015, 9:53 AM Business Insider ! Jerome Kohlberg will be remembered as a conservative mind in one of Wall Street's gaudiest eras. Henny Ray Abrams/AP Jerome Kohlberg was a gentleman in an age of 'Barbarians at the Gate.' The founder of private equity firm Kohlberg Kravis Roberts & Co died on Thursday at his home in Martha's Vineyard, Massachusetts. The death of the man who founded private equity giant KKR should serve as an opportunity for reflection at how much the business has changed in the fifty or so years since he pioneered the private equity investment model. Kohlberg's mentality as a private equity investor was based in the tried-and-true operational improvement strategy. He wasn't a fan of financial engineering and he shunned mega-deals. He put rates of return for his investors ahead of the size of his firm. "Jerry was a real visionary, having played an important role in developing the private equity model in the 1960's, and he was a true mentor to George Roberts and me," KKR co-founder Henry Kravis said in a statement provided to Business Insider. "Subsequently, he became an important factor in launching KKR, the first private equity firm, with George and me." The firm was relatively insignificant when it first started out. KKR's first fund was $31 million, a paltry sum by today's standards. The returns however were incredible in the early years. KKR returned 22.5% on its 1980 fund, and nearly 40% on its 1982 fund. In 1987 Kohlberg left KKR in an surprising departure, telling his colleagues "We must all insist on ethical behavior or we will kill the golden goose." He went on to found private equity firm Kohlberg & Co., which didn't raise a fund in excess of $2 billion in 20 years of existence. At KKR, meanwhile, the fund bearing his name would successfully pursue what was at the time the biggest buyout in the history of the private equity industry. The back-and-forth tale of the buyout of RJR Nabisco was chronicled in Wall Street tome 'Barbarians at the Gate' which earned the industry a nickname and reputation in finance that stuck with it for years. Under Kravis, who Kohlberg supervised in the 1970s at Bear Stearns, KKR went on to pursue enormous LBOs. ! Henry Kravis, co-founder of Kohlberg Kravis Roberts & Co., smiles during a media briefing in Hong Kong Thomson Reuters KKR has grown to manage a total of more than $50 billion today. Some deals, like an investment in energy firm TXU, have failed spectacularly. KKR's internal rate of return,judging by returns reported by Oregon's pension fund, have not matched the success the firm had in the years prior to Kohlberg's departure. The private equity giants of today are almost unrecognizable from the firm Kohlberg founded. They have diversified from buyouts into the likes of real estate, loans and hedge fund trading. They have amassed billions in assets too. KKR rival Carlyle has more than $60 billion in dry powder to spend, for example. The industry is expected to try and grow that cash pile by extending its efforts to attract money from retail investors and 401(k) portfolio managers. The fact that private equity has beaten returns on the S&P 500 with consistency is likely to add to its appeal. Those efforts are built at least on part on the work and reputation of Jerome Kohlberg. The industry's next generation of investors will be keenly aware if the 'barbarians' of today fail to match the standards set by the grandfather of the PE business -- namely that fund performance is the key point. The example Jerome Kohlberg set running Wall Street's first private equity firm is a very hard act to follow, even for Henry Kravis. .

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'Barbarians at the Gate'
Tuesday 27 July 2010 ‘Barbarians at the gate’ DH News Service Proposed changes in the takeover code may make Indian companies open to hostile acquisitions, but modifications were much needed writes, Dilip Maitra In 1990, when the giant private equity fund KKR (Kohlberg Kravis Roberts & Co) raided and acquired the American biscuit company RJR Nabisco Corp in a $25 billion leveraged buyout (LBO), the tussle between RJR and KKR was documented in an aptly titled book ‘Barbarians At The Gate’ written by financial journalist Bryan Burrough. Now in India we may soon come across situations where many corporate chiefs will complain about ‘Barbarians’ at their gates because India’s merger and acquisition (M&A) rules are all set for a complete makeover from April 2011. The rules will become simpler, more transparent and free from many roadblocks that now come in the way of M&A. The M&A activities in our country are regulated by the Takeover Code laid out by the capital market regulator Securities and Exchange Board of India (Sebi ). To overhaul the 15-year old takeover rules, last week a Sebi- appointed committee, Takeover Regulations Advisory Committee, headed by C Achuthan, proposed sweeping changes in many important issues like open offer trigger, offer size, pricing norms, non-compete fees, etc. Changes proposed by the Achuthan committee are now open for public debate and, if accepted, will become the new Takeover Code from the next financial year. The real threat In a major change, the Achuthan committee suggested that the trigger point for a mandatory open offer should be raised to 25 per cent of the equity capital.
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BURROUGH Would Say That We Hadn’T Already Said in Our Journal Stories,” Says Burrough
for The Wall Street Journal. When the two of them began pitching a book on the RJR Nabisco saga, “every publisher wanted to know what the book BURROUGH would say that we hadn’t already said in our Journal stories,” says Burrough. Only one publisher, Harper Collins, offered the two a contract, for $150,000. Minus their agent’s on “BARBARIANS” cut and distributed in installments split between the authors, that amount was just enough to allow Author bryan burrough discusses how his Burrough and Helyar to take some time off from and John Helyar’s masterpiece on the RJR Nabisco The Wall Street Journal. takeover changed the way deals are done Burrough, 27 at the time, had been covering Wall Street for only four months, “and I only wrote for t the barnes & noble bookstore on the Wall Street Journal because it was the best job New York’s Fifth Avenue, thousands I got offered out of college, not because I had any of titles cram the shelves of business interest in business. My interest was much more in books, suggesting that it won’t be easy true crime.” A to find a 28-year-old tome about an Neither Burrough nor Helyar had ever written a ’80s-era takeover. Does Barnes & Noble even carry book. “We started working on it on January 2nd and Barbarians at the Gate any longer? we turned it in over Labor Day. For those months, The title clearly rings a bell with the young man it was a seven-day-a-week, 16-hour-days thing.
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